The capital increase, announced late Monday along with the earnings figures, led analysts at several banks including Nomura, J.P. MorganJPM-0.74% and Credit SuisseCS0.03% to raise their recommendations on the stock, saying that the German bank now looks more attractive than its rivals.

J.P. Morgan analysts said the bank is "finally starting to address its capital issues," and had set a "new capital bar for Eurobank peers."

The new stock was priced at €32.90, equal to Deutsche Bank's closing share price Monday. Share placements typically come at a discount to encourage investor buying.

However, some analysts said they aren't convinced Deutsche Bank has succeeded in its stated aim of taking the capital issue "off the table." Espírito Santo's Andrew Lim said the amount raised probably isn't enough to alleviate concerns about what he called an "enormous equity deficit."

"Our concern is that the admission of the need for capital merely raises scrutiny that the bank needs even more. There is no need for investors to expose themselves to this risk," Mr. Lim said.

Deutsche Bank, in a reversal, said Monday it would raise about €2.8 billion ($3.65 billion) in fresh capital, giving in to months of pressure from investors and regulators to improve its capital base.

Europe's No. 2 lender by assets has long faced doubts from investors and analysts about whether it has enough capital to absorb potential future losses and to meet increasingly stringent regulatory requirements. On paper, Deutsche Bank had one of the thinnest capital ratios among large European banks.

ENLARGE

Deutsche Bank's headquarters in Frankfurt.
Bloomberg News

After insisting for years that the bank had plenty of capital and that it could bridge any shortfall through churning out billions of euros in annual profit and reducing risk, Deutsche Bank executives Monday suddenly changed course.

In a brief statement after European markets closed, the bank said it would issue 90 million new shares to institutional investors and that it might issue an additional €2 billion of other securities to further increase its capital over the next year.

The bank had about 930 million shares outstanding before the new issue.

Deutsche Bank said the move would increase an important capital ratio to 9.5% of its risk-adjusted assets from 8.8% currently. That would move Deutsche Bank ahead of most of its European and U.S. peers.

In 4 p.m. New York Stock Exchange composite trading, Deutsche Bank shares rose $1.58, or 3.7%, to $43.85, as the share sale assuaged investor concerns about the bank's capital ratios.

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The bank Monday evening also reported robust preliminary first-quarter earnings, with a 19% increase in net profit to €1.65 billion from €1.39 billion a year earlier. The earnings were buoyed by stronger revenue, which was up 2%, and a reduction in total expenses.

Since taking the German bank's helm last year, its co-chief executives have said increasing capital was a top priority. But they promised not to do so by issuing new shares, which erodes the value of existing investors' shares.

"The bank aims to apply all capital levers at its disposal before considering raising equity from investors," co-CEO Anshu Jain said during a conference call with analysts last July. In January, he again repeated that the bank had no plans for a capital increase and that it wasn't in the best interest of shareholders, while adding he couldn't rule out any options.

Instead, the bank managed to strengthen its capital by reducing risk-weighted assets by about €80 billion through the end of the year. The bank's so-called core Tier 1 capital ratio under new regulations known as Basel III rose to 8% from 6% a year earlier, then dropped to 7.8% after the bank provisioned for legal costs. The ratio rebounded to 8.8% in the first quarter after an additional reduction in risk-weighted assets of approximately €20 billion.

The Basel rules don't fully kick in until 2019, but banks across Europe are under pressure from regulators and investors to comply with the rules before then. Few investors or analysts expected the bank to meet the targets in 2013.

The capital increase allows Deutsche Bank to act from a position of strength with only modest dilution to shareholders, while putting the bank's ultimate 10% capital-ratio target within reach, the lender said in a slide show for an analyst call scheduled for Tuesday morning.

Christopher Wheeler, a London-based banking analyst with Mediobanca,MDIBY45.20% said investors will see the capital increase as a positive for the bank now that it is in line or ahead of most peers on capital.

"They said they wouldn't raise equity, but they did," he said, adding that both former CEO Josef Ackermann and Mr. Jain had expressed concerns about diluting shareholders in the past. "They are biting the bullet, and this is absolutely the right way to go."

The size of Deutsche Bank's capital increase is relatively modest compared with what some bankers, analysts and investors think it needs. Analysts previously estimated the bank needs as much as €10 billion.

Deutsche Bank executives have been meeting in recent weeks with senior investment bankers to sound them out about how much capital the bank would need to raise to placate investors, according to people who participated in the meetings. The bankers' response: Deutsche Bank should come up with at least €6 billion and possibly as much as €10 billion to put the capital concerns behind it, these people said.

The bank's change of heart apparently stemmed from executives' frustration with the lack of reaction among investors to Deutsche Bank's strategic changes, according to industry officials. The bank's management felt it could raise a token amount to alleviate market concerns without destroying credibility, these people said.

The timing of the capital increase could raise questions because earlier this year, with Deutsche Bank's stock trading at more than 15% above its current levels, executives insisted they had no plans to raise new capital. If they had proceeded with the share sale at the time, they could have raised more capital by selling fewer shares, a preferable outcome for existing shareholders.

While Deutsche Bank didn't disclose the terms of the share sale, industry officials said the deal's structure would likely involve a small number of big institutional money managers picking up the shares at a small discount to the stock's current trading price. Because the share sale is relatively small, Deutsche Bank doesn't need to offer all existing shareholders the right to participate, a potentially costly and complex process that executives were eager to avoid.

In its earnings report, the bank said net revenue rose to €9.4 billion in the first quarter from €9.2 billion a year earlier. This was helped by revenue increases in asset management and global transaction banking, while the investment bank saw a 4% decline in revenue, which the bank attributed to reduced client activity in a weaker market environment. Revenue in the retail clients business was also slightly lower.

The bank's efforts to control costs as part of its new strategy also kicked in, with noninterest expenses down 5% to €6.6 billion as it lowered administrative costs, compensation and benefits.

Analysts reacted positively to the earnings. "The figures will give Deutsche Bank tailwind for selling their shares in the capital increase," said Dirk Becker, a banking analyst with Kepler Capital Markets in Frankfurt. Deutsche Bank had already done well on reaching its capital goals through internal measures and didn't need to boost capital, he added. "The market gets what it wants," he said, adding that the move will greatly curtail discussions at investor roadshows.

—Dana Cimilluca, David Enrich and Ulrike Dauer contributed to this article.

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